Selling Stocks to Buy a House

It stinks, but here's the way to do it.

For first-time homebuyers without existing home equity, selling stocks is a common way to raise a down payment. And with banks and mortgage lenders like Washington Mutual (NYSE: WM) and Countrywide Financial (NYSE: CFC) becoming more conservative in their lending practices these days, you should expect to pony up at least 3% to 5% of the home's value for a down payment with most loan programs.

In many large cities, such as Washington, D.C., Boston, and Chicago, that could mean a cash deposit of anywhere from $10,000 to $25,000, just for a starter home. That might be more than you have saved in checking or savings, and if you can't get a generous cash gift from family, that probably means you'll have to sell some of your investments.

While selling stocks with great potential is less than ideal, having a place to call your own is also a wonderful thing. If you must sell stocks to help make a house down payment, here are a few tips.

Be mindful of taxes ...Selling stocks that you've held for more than a year is ideal. That way you'll qualify for lower long-term capital gains rates and only get hit with a maximum 15% tax on your gains. Anything held less than a year is a short-term capital gain and is taxed at your regular income tax rate, up to 35%. That can put a crimp in your returns. For instance, if you've made a $1,000 gain, you'll net $850 after tax for a long-term gain, but just $650 for a short-term gain.

It is also possible to offset gains by selling stocks trading at a capital loss. If you have stocks trading at a loss, it might be a good time to accept the loss and put the proceeds in an interest-bearing savings account.

... but don't wait too longAs you approach closing time, it's tempting to hold onto your stocks until the last minute, particularly if they've done well in the past. You may hope they'll squeeze out more gains and allow you to put down more money. But that hope can come back to haunt you.

Consider some recent examples:

Company

Returns 1/8/2007 to 1/8/2008

Returns 1/8/2008-2/7/2008

SunPower (Nasdaq: SPWR)

205%

(45%)

Baidu.com (Nasdaq: BIDU)

183%

(33%)

Apple (Nasdaq: AAPL)

100%

(29%)

Source: Capital IQ, a division of Standard & Poor's.

Silence your inner Gordon GekkoThe lesson here is: Don't get greedy. If you have a solid gain and need cash in the near future, sell the stock. After all, you can't transfer stocks to the mortgage company for your down payment -- they only want cold, hard cash and won't care if your stock plunges in value right before closing.

So whenever you begin planning to buy a home, it's important to implement a prudent selling strategy with taxes in mind so that you have the cash you'll need at closing.